On the right there was much selective looking at data to argue that America does not produce (in aggregate) relatively poor health outcomes for the dollars spent. You can pick individual conditions and show America is better-than or worse-than average. But any reasonable overview of the American system will come to what I think is a non-exceptional conclusion.

On the left there were several people who argued that pharmaceutical research done by capitalist drug companies was simply not important – citing the development of cosmetic and “me too” drugs and ignoring substantial research. They argued real medicine is done by governments and universities – in other words good research is a socialist or semi-socialist activity. That is simply blinkered. One of my close friends – who has spent his adult lifetime doing cutting edge genetics research for profit (and who grew up under Chinese communism) simply responded that there are plenty of people who still believe communism is a good idea.

Anyway one of the things that is patently obvious about America and its stock market (at least looking from Australia) is that it produces fantastically innovative companies. American Capitalism gave us semi-conductor capital equipment producers, Google, the planes that enabled cheap commercial jet travel and mass marketed chewing gum. More than a few of these involve some research. Even the most cursory look at the product set of Amgen – a major drug company – would suggest that American capitalism funds some impressive drug research.

Strange views like these exist in all countries – but the extent to which irrational right wing views are not controversial in the right and irrational left wing views are not controversial in the left is hardly a recommendation for America’s democracy. (Americans call it polarization.) The question is what are you going to believe: the prima-facie thing that is consistent with your ideology or your own lying eyes?

At the moment ideological belief that is inconsistent with reality is (far) more pervasive on the right as seemingly serious right wing politicians pander to Rush Limbaugh’s lack of nuance or to anti-scientific creeds such as creationism. But it is not always going to be that way – and some of the responses to my post suggest that there is a latent left wing Limbaughism too.

But this is just tearing wings off butterflies. There are plenty of stupid and/or ideologically blinkered people out there. Pointing them out has about the same level of charm (and general interest) as making fun of “creation scientists”.

I write an investment blog – and I have no reason to be interested in where commentators in the blogosphere are demonstrably wrong because they argue from their ideology rather than observable facts. I have a really big interest – a money making interest – in where people are wrong in markets because they rationalize from ideology rather than observable facts. These things happen – for many years market driven ideologues thought that the securitised mortgage market was fine because it was done by private sector participants (and it mostly dealt in mortgages that Fannie Mae and Freddie Mac were prohibited from dealing in). They were wrong. Anyone who hung out with a half dozen mortgage brokers and saw the trash they were underwriting could have (and should have) worked out that this was a disaster. Ideology trumped facts on the ground. And it gave some stupendous money making ideas. People made hundreds of percent returns on their money shorting the AAA strips of CDO squared securitisations and other high-finance dross. I know someone that made billions (yes billions) of dollars betting that subprime lending would end in a crisis – and they only had to risk tens of millions of dollars to make that money. Stupid ideology gave huge profit potential. That stupid ideology came from the right because at the moment there is (much) more stupid ideology on the right – but again it was not always that way and will not always remain that way.

So – here I am begging my readers. Much as I like reading about creationist astronomy and postmodernism and the Sokal Hoax and other people made stupid by their ideological blinkers - I would prefer find market sensitive stupidity. If people can reply with ideas and the easily observable facts that prove them wrong I would be thrilled. Emails acceptable. But please no argument based on your ideology versus their ideology. I am only interested in argument which is “their ideology versus readily testable fact” and then I am only interested if we can make money out of it.

37 comments:

mcdruid
said...

I am not sure you should dismiss US Government contributions to Pharma R&D as you seem to. I can't yet find any hard numbers, but there are some articles (http://www.healthbeatblog.com/2009/04/the-truth-about-how-cancer-drugs-are-developed-.html and http://money.cnn.com/magazines/fortune/fortune_archive/2005/09/19/8272884/index.htm) that suggest Pharmas' drug portfolios are deeply indebted to public funds. The former article points out that a third of Bristol-Meyer's anti-cancer revenue in 1995 is due to a single, government developed drug.An accurate accounting would also have to consider failed drugs: ones that don't work. This also constitutes an expense for developing new drugs.

John, you might want to look at some commentary on China, either here at my blog or at Pivot Capital here. Its doubtless the big consensus long / nothing to see here position for a good many people, not least of all Australian economic forecasters and Goldman. Additionally, it looks like politics there might be less than stable, Xi Jinping just missed his promotion.

I generally agree with your comments here, but I believe you are a victim of your own ideological blinkers in thinking that making money is the be all and end all of human endeavor. This is the same virus that infected the bankers that caused the financial crisis. But, keep up your good work in rattling the cages of ideologs everywhere.

There will be a V-shaped global economic recovery and growth in the U.S. will surpass expectations.

The right wing does not believe that keynesian stimulus works. It does. The left wing does not believe that monetary policy works . It does.

They are both wrong and are underestimating how vigorous this recovery will be. Everything we know about business cycles says that this one coming is going to be incredibly strong. Being long on stocks now is like being short in late 1999 early 2000.

It's also the best time to buy a house in the U.S. but try telling that to people at a cocktail party.

I love this idea. For example when Obama got elected, gun sales rose and gun related stocks went up because ideologues on the right thought he would ban guns. Then when he didn't do that, the sales and stocks went back down. It was an ideological bubble.

One thought would be to get in on the same ride insurance stocks will go on if/when the Obama reforms pass. Many ideologues on the right will assume the stocks are as good as dirt and dump driving the price down. Then when it becomes clear that public insurance will survive "Obama Care" the stocks will slowly go back up.

Get in at the right moment here and you could clean up.

This is my first post here but I may be checking back in. The wife and now I are trying to learn how to play in the stock market and have been dabbling in Fannie and Freddie because it's so affordable to play with now. I still have no idea how to short stocks and find it a bit intimidating to learn.

Can anyone here point time to any information on how to short stocks?

I am sure that will be important to know when it comes to making money off of ideologues, something I too am very interested in because I truly believe stocks and commodities run on pure emotion more than anything else. I knew the housing market would crash two years out and I know very little about stocks. I did know that most people can't afford a $500,000 house in the town I live in.

I predicted the tech bubble and crash based on the same common sense approach and was 100% right on the money on that one. Unfortunately I never figured out how to make any money off of this kind of knowledge/sense. I really would like to be ready to capitalize next time I see a trend like that.

A comment on making money and the whole global warming thing. This is more "food for thought" than real advice. I dunno how well it fits in with your theme and it needs a brighter man than me to work out how to get rich from it.

If you look at the cost of doing something in a "low carbon" way vs a "carbon intensive" way, there's not too much additional cost. Often there's a cost benefit, because you're wasting less energy or whatever.

The *trick* is that often businesses have made huge capital investments on the back of doing things the carbon intensive way.

People have thought a lot about the obvious things, e.g. power stations and aluminium smelters.

There's one other big area that people haven't talked about endlessly - *property*. Property hangs around for 20-40 years on razor margins. Long leases. If cap rates go down a percent REITs fall over like dominoes. The whole sector is so finely tuned it can't cope with big kicks up the bum (witness the last 12 months).

I'm pretty sure that all this Copenhagen stuff will end up being derailed. Then in 10 years time people will wake up and we'll have a big "oh shit" moment. Carbon taxes and whatever will be to late. We will get direct government action at it's most headless.

And what's going to happen? Power and aluminium is easy to work out. No idea what happens to transport. But commercial property, where every building suddenly needs all its windows changed and insulation installed and low energy air-con installed and so on? That's 5% of the value of the property in a lot of cases. Government will just mandate it. No compo. Lessees won't cop it. Lenders won't cop it. REIT managers will probably try to pull out yet more fees. Investors will get screwed.

So I think commercial property is a long-term avoid. Particularly anything with a lot of glass and air-con. If you can think of a magic way to keep a short on these guys on long timescales you could do well.

- disclaimer - I have a lot of carefully picked REIT sub-debt at the moment I picked up very cheaply over the last few months.

I guess faith in the "business cycle" is the new religion of the 21st-century. Just a few years ago the economists were telling us that they had overcome it; now it is back and will lead us to the Promised Land.

Those who are clinging to the idea of a cycle now when they perceive that we are near the nadir are the same ones who a few years ago refused to accept that we could have an apex.

I'm not saying another bout of increased leverage and currency devaluation can't raise nominal asset prices, but the certainty that it is inevitable and imminent is as dangerous to one's financial health (as is any certainty of inevitability and imminancy.)

Also, I learn alot from your technical analyses, especially Fannie and Freddie, I did not have any comments because, my mind was still tryiing to catch up with everything.

I am in the energy business and I think that there is alot of misconceptions in the energy business.

Most people in the energy business are extremely right wing.

People sneer at wind or solar power and assume it will never amount to anything. Peak oil is another topic which gets only stares when one mentions it. The Oil industry lives in a ideological world, one which does exist in reality.

Big oil thought that the U.S would need to begin importing LNG immediately and spent billions to be wrong.Big oil thinks that wind and solar are 100 years away from being competitive - wrong.Big oil thought that there was not domestic natural gas to explore - wrongBig oil thought that small oil domestic oil fields were a waste and sold them - wrongBig Oil has just experienced massive inflation in its costs and expects to be able to pass those costs on to consumers.Big oil is doing everything to thwart the Obama Administration.

Mr. Hempton, I agree with your analysis on the fact that you can't substantially reduce your payment by defaulting on your mortgage and renting. I think there is another issue (not sure of the size of it) of people simply ending their mortgage payments while continuing to live in their house. I personally know some people who have done this for around 6 months now with no action on the part of the mortgage servicer. I live in a state which is not particularly favorable to defaulters (as far as I know).

I assume this situation is temporary, but if the servicers really are reluctant to foreclose then won't that cause losses to Fannie/Freddie since they are guaranteeing payment to the bondholders?

I have no idea how widespread this refusal to pay is, but I'm sure that the GSE's would prefer to amortize the non-payment and call the loan good. It does create a cash flow problem, however.

I always enjoy your blog. I do disagree with your analysis on health care. Once you take out murders and accidents the US does better than almost every country. If you adjust out black people who are for some reason more likely to be ill across all income groups, then you are at the top by far.

My gut is that people know that (and as much as the US is not any sort of free market paradise today) and they do not want it to change. I think there's going to be a point where a long XLH/short SPU type trade will outperform. You just have to put it on before the first vote on a big healthcare "reform" package.

In the same vein, IMHO most people either believe that local municipalities are headed for bankruptcy or that this is overrated. A good analyst could put on a widening trade with shorts in some muni's and long others.

Not exactly in the equity sphere, but in currencies and commodities there seems to be a lot of ideological capital invested in the notion that the evil government will destroy the value of money and the US will soon experience (hyper)inflation.

US bankers/traders seem as a rule to be strongly disposed to a Libertarian/Randian worldview and the "dollar goes down forever/commodities to the stars" trade seems justified largely with ideology driven arguments that the dollar will be deliberately destroyed even as the US trade deficit declines sharply and actual inflation seems remote.

To make money of that ideology driven trades unwind (if correct) would require going long dollar, and for those with lots of intestinal fortitude, short commodities, esp. gold and oil.

Now that they are allowed to guarantee much larger mortgages than before, how much confidence do you have in the future performance of their "traditional" books? It seems to me that the past data we have about the behavior of their guaranteed mortgages cannot necessarily be trusted to predict future losses. We are introducing another uncertainty that was never present in the data sets before.

I don't really have much knowledge on how much the book is evolving over time, but I thought you might be better informed.

Anyhow, does this consideration weigh at all on your assessment of FRE's earnings power? Given that even a few basis points of net defaults make a huge difference in valuation...

Fact: World GDP was estimated to be about 32 trillion per year in 2000. World GDP is estimated to be 64 trillion per year in 2009.http://www.imf.org/external/pubs/ft/weo/2008/02/weodata/index.aspx

Subjective Feeling: Technology advances (everything, not just computer related) made over the last 9 years don't seem all that significant given that the pool of money from which to draw investment has probably doubled.

The NY Times just (9/22/09) wrote about a UPenn study that explains that the poor relative performance of the US system in during the middle years of life, while in latter years patient care compares favorably with other countries. Why? Until recently too many Americans smoked, rates of obesity are higher than many countries and drug use is significant. Combine that with 12 million illegal aliens who only seek health care when it is absolutely necessary, you can account for much of the problem. But the cause is not the delivery system.

With your guess that Ron Paul will become the next President of the United States Of America, now, I would love to include you into their site. But I doubt Wrongtomorrow.com allows an entry posed by someone named Anonymous.

ENERGY: photovoltaic and wind turbines are very hot and trendy, but the reality is that without subsides from the government they just don't make much economical sense. My feeling is that they prosper RIGHT because they're capital intense: a lot of people can steal from that big amount of almost or totally free money flowing from government and banks. Myself i got a proposal to invest in a photovoltaic project where investors recover immediately 50% of the sum invested because they pump up cost and get 85% leverage.My opinion is that the only real cheap energy source will be new generation nuclear plants, geothermal energy (which is exploiting earth's nuclear energy...), high altitude wind energy, solar termal energy. Google invested in the latters 3 technology. Makers of photovoltaic panels are just like hard disk producers: high technology risk, high research cost, fast obsolescense. I would never invest in any of these.Having said this, the lowest hanging fruit for energy generation is actually saving energy. I'm pretty sure that saving a wasted kw is todays' world is much cheaper than producing it.These are the areas where i'd focus energy investments.

TECHNOLOGY: I would stay away like hell from personal computer producers. Everybody is noticing that a powerfull and up-to-date computer is just not needed anymore. You just need a light computer with internet: google and other online resources will enable you to do whatever you need to do. You don't need a new expensive OS each 2 years also, only the pc producers need it so that they can sell you a newer and more expensive machine.

Robotic may be next big thing. I see robotic innovation everywhere and not many talking about it. We have the need and we have the technology now.We have robotic arms: http://www.wired.com/gadgetlab/2008/05/dean-kamens-rob/We have full esoskeleton for soldiers: http://www.zimbio.com/Robots/articles/22/Army+Develops+Robot+Suit+Enemy+Says+Aww+crapWe have robot mule: http://www.youtube.com/watch?v=W1czBcnX1Ww

We need this technology for health care, for security and surveillance, for elders assistance.

GLOBAL WARMING:My feeling is that this maybe be all fake. It looks like western countries are pushing this argument in order to force cap & trade system, so that they can tax imported products made from high co2 producing countries, and sell their carbon dioxide sequestration technology to the same developing countries. Also this will create a huge trading market for carbon credits and many people will make money with it. An article worth to be read: http://blog.mises.org/archives/010939.asp

SWINE FLU, BIRD FLUIHMO all fake. All propaganda to make money and make WHO feel important. Do you know anyone who died of any of these flu? It's just flu. I made money myself buying Biota, sold it today, cause at this point to me it's clear it's all bullshit.interesting article: http://www.forbes.com/2009/10/16/swine-flu-world-health-organization-pandemic-opinions-contributors-michael-fumento.html

JUNK FOOD:Soon or later people will realize that's n. 1 health problem in developed countries. At that point all the money Coca Cola and Mcdonald can put in lobbying won't be enought to stop the process. Government will be forced to act and to act fast.

Growing corn or soy and other plants to extract ethanol doesn't make any sense, because in modern agricolture, due to the intense usage of machinery and fertilizers, you need to invest several Kcal of OIL or OIL equivalent to get 1Kcal of food. If you convert this food to fuel, you need to invest even more energy, so the net result is less than 1kcal of fuel. It works only if heavily subsidized by government.

Using exhausted vegetable oils, animal fats or waste oil to produce biodiesel is a completely different story. You're using something which usually is trashed to extract fuel. Every year many millions of tons of this kind of wastes is... well, just wasted. Companies well positioned to take this business should do well. An investment idea could be Gushan Enviromental Energy, is the leader in china in producing biodiesel from waste, and its stock value is less than half its book value. They're facing a tax problem but i think they will do well. more info: www.chinagushan.comhttp://finance.yahoo.com/q?s=Gu

it's not a probe. There's a new fuel tax in china since 2009, and GU is not sure they have to pay it, and made a formal clarification request to the government, they're waiting for an answer. In the meanwhile, they stopped part of the production, and put aside 20M usd to pay the taxes in case they have to. That's why share prices collapsed.

It would be fun to have your take on what you look for when gaging the 2nd part, i.e. make money. It's not hard to have confidence that this or that widely held (particularly inside the bubble of a given industry) conventional wisdom is wrong; but it is a damn site harder seeing when and how the break away from that delusional state will happen. Some of this is social, but some of it is the immovable installed base(s).

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.